Legislature(2003 - 2004)
04/07/2004 01:44 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
April 07, 2004
1:44 P.M.
TAPE HFC 04 - 79, Side A
TAPE HFC 04 - 79, Side B
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 1:44 P.M.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Eric Croft
Representative Hugh Fate
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Carl Moses
Representative Bill Stoltze
MEMBERS ABSENT
Representative Mike Chenault
ALSO PRESENT
Representative Ogg; Cliff Stone, Staff to Representative
Ogg; James Armstrong, Staff to Representative Williams;
Tomas Boutin, Deputy Commissioner, Department of Revenue;
Dennis DeWitt, Special Staff Assistant, Office of the
Governor; John Vowell, Director, Division of Alaska
Longevity Programs, Department of Health & Social Services;
Nico Bus, Acting Director, Division of Administrative
Services, Department of Natural Resources; Eddy Jeans,
Manager, School Finance and Facilities Section, Department
of Education and Early Development; Pete Kelly, Director of
State Relations, University of Alaska
PRESENT VIA TELECONFERENCE
Dick Mylius, Deputy Director, Division of Mining, Land and
Water, Department of Natural Resources; Joe Beedle, Vice
President, University of Alaska
SUMMARY
HJR 9 Proposing amendments to the Constitution of
the State of Alaska relating to an
appropriation limit and a spending limit.
CSHJR 9(FIN) was REPORTED out of Committee
with individual recommendations and with two
fiscal impact notes.
HB 333 An Act relating to an endowment for public
education; and providing for an effective
date.
HB 333 was heard and HELD in Committee for
further consideration.
HB 422 An Act repealing the special subaccount
established in the constitutional budget
reserve fund; relating to the powers of the
Department of Revenue for the investment of
amounts in the constitutional budget reserve
fund; and providing for an effective date.
CSHB 422(STA) was REPORTED out of Committee
with a "do pass" recommendation and with one
previously published fiscal impact note.
CSSB 301(FIN) An Act relating to the Alaska Pioneers' Home
and the Alaska Veterans' Home; relating to
eligibility for admission to the Alaska
Pioneers' Home and Alaska Veterans' Home;
relating to the eligibility of residents for
the Alaska Pioneers' Home and the Alaska
Veterans' Home for general relief assistance;
relating to state veterans' home facilities;
making conforming amendments; and providing
for an effective date.
HCS CSSB 301(FIN) was REPORTED out of
Committee with a "do pass" recommendation and
with one previously published fiscal impact
note.
HOUSE JOINT RESOLUTION NO. 9
Proposing amendments to the Constitution of the State
of Alaska relating to an appropriation limit and a
spending limit.
Co-Chair Harris MOVED to rescind the action in failing to
pass out CSHJR 9(FIN). There being NO OBJECTION, it was so
ordered.
Co-Chair Harris MOVED to report CSHJR 9(FIN) out of
Committee with the accompanying fiscal notes. There being
NO OBJECTION, it was so ordered.
Vice-Chair Meyer expressed appreciation that the measure was
brought up again so that he would have the opportunity to
vote to move it out.
CSHJR 9(FIN) was REPORTED out of Committee with individual
recommendations and with two fiscal impact notes.
HOUSE BILL NO. 333
An Act relating to an endowment for public education; and
providing for an effective date.
Co-Chair Harris MOVED to ADOPT Work Draft 23-LS0991 Version
O dated 4-2-04. There being NO OBJECTION, it was so ordered.
REPRESENTATIVE DAN OGG explained that the bill recognizes
the long-term desire of Alaskan residents through the
Legislature to fulfill a land grant to the University of
Alaska, and it creates the Public School Trust Fund. HB 333
creates a tenants in common with the state, whereby public
education would receive a 3% undivided interest from state
land and the University would receive a 2% undivided
interest. The Department of Natural Resources (DNR) would
retain the rights and management of the land, and the
heightened fiduciary duty would not apply to either the
University or the public schools.
Representative Ogg described receipts. All receipts derived
from development leases on the land would be calculated
after deducting Constitutionally-mandated contributions to
the Permanent Fund, the existing receipts of .5% of revenues
for the Public Schools Trust, as well as administrative
service fees, sales fees and lease fees assessed by the
Department of Administration. He pointed out the difference
between Version N and Version O of the bill is that receipts
are limited.
Representative Ogg noted that there had been discussions
between the DNR and the University to define when the
receipts would start. Receipts are addressed in the language
on page 6, Sec.8, lines 25-27, "income received by the state
under contracts for royalties, rents, sales, leases, and
other disposals of state land entered into on or after the
effective date of this Act." He clarified that a new
contract with Bristol Bay would be included, while an
existing contract at National Petroleum Reserve-Alaska would
not.
Representative Ogg pointed out that HB 333 rescinds SB 7 and
its 250,000-acre land endowment to the University. He
discussed the legal battle over SB 7. Former Governor Tony
Knowles had vetoed SB 7 almost immediately after its
passage, and the Legislature overrode his veto with a 2/3-
majority vote. Governor Knowles released an attorney
general's opinion stating that the bill was an appropriation
requiring a three-fourths vote to override. The Alaska
Legislative Council sued to question the constitutionality
of the veto override. In January 2004 the Supreme Court
showed that the Legislature's override was proper. The
granting of land is not an appropriation, and therefore
subject to the two-thirds vote. Representative Ogg referred
to the copy of the Supreme Court Opinion in the packets
(copy on file.)
Representative Ogg explained that the Supreme Court was
unable to decide whether the law granting the land was a
dedicated fund because it was not brought up on appeal. It
remanded the case to Superior Court, which may take a couple
years to decide the issue.
Representative Ogg concluded that HB 333 would grant land to
the University in a different fashion than SB 7, by allowing
the State to manage it. Over time, it may not ever fully
fund the University, but he said that it would augment its
funding.
He referred to "Legislative Research Report, Number 04.176"
(copy on file), noting that the projections on page 2 show
$21 billion of revenues in 2030 from new oil exploration and
gas line contracts. The K-12 trust fund would be about $600
million, with 5% totaling another $30 million for the K-12
school system. The University trust fund would be
approximately $400 million, with an extra $20 million.
Representative Ogg noted that the new fiscal notes total
zero. There is a savings to the State and the University
system to grant the land in the manner proposed in HB 333.
He pointed out that if SB 7 were retained, the fiscal notes
on the selection of land and its management would total many
millions of dollars over a period of time.
Representative Fate asked if an in-depth comparison had been
done of the revenues that might have derived from the
250,000 acres in SB 7, and HB 333's provision for 3% of
revenues from new land lease contracts.
Representative Fate also questioned the bill's provisions
allowing the DNR to manage the lands and removing the
management prerogative of the Board of Regents. He
recounted, from his sixteen years on the Board of Regents,
that when DNR had management responsibility the profits from
the land in the endowment weakened, with little if any
profitability until the University took it over. He asked if
the sponsor had concerns regarding the DNR's management.
Third, Representative Fate asked if the bill inadvertently
takes away the Board of Regents' management of its other
lands in endeavoring to relinquish this management
responsibility.
Representative Ogg replied to Representative Fate's third
question first, stating that there is a separation of lands,
and HB 333 only addresses the lands granted under the
percentage basis. The bill's intent is to not restrict in
any way the existing lands that the University manages.
Representative Fate questioned the deleted language at the
bottom of page 2, [LAND CONVEYED TO THE UNIVERSITY OF ALASKA
UNDER AS 14.40.365]. Representative Ogg clarified Sec. 2(a)
adds "except for land transferred under AS 14.40.505," so
the University land is not treated as State public domain
land. It is not subject to the DNR, and the University can
manage it however it wishes, except for this new portion of
lands granted to them as tenants in common.
Representative Fate thought that it is only specific to the
new land grant, and again asked if it inadvertently takes
away management of the other endowment land of the
University. He felt that the Board of Regents' authority is
unclear in the bill. Representative Ogg did not believe it
takes away the clarity, because the intent of the language
is that the University would continue managing its existing
112 acres.
JOE BEEDLE, VICE PRESIDENT, UNIVERSITY OF ALASKA added that
Representative Ogg was correct in stating that the
University would retain its authority over its existing
lands after passage of the bill.
Regarding Representative Fate's second question, Mr. Beedle
clarified that the DNR manages land in the public interest
and holds the land in public domain. The University manages
its land more as a fiduciary responsibility, to maximum
revenue and educational opportunity consistent with all laws
and regulations, but it is not designated as public domain.
Representative Ogg responded to Representative Fate's first
question of whether there is a cost analysis of revenues
that would derive from this land and revenues from the
250,000 acres of land selected in SB 7. A cost analysis had
not been done because the University has not selected lands
under SB 7; however, under the fiscal note passed with SB 7,
it would cost $2.1 million every year in the selection
process and development, adding about $10 million in costs
over five years, with no receipts coming in. He said that
even if the land were obtained today, under SB 7 it would be
10 to 20 years before it would be developed. Under HB 333, a
revenue stream would begin to flow as soon as new state land
contracts are let.
Representative Fate pointed out that fiscal notes often show
the expense side and not the revenue side. Any derived
revenues from oil or gas development would be long term, and
he stated that Representative Ogg would be misled if he
thought that the revenues would arrive in the short term.
He argued that a cost comparison would be useful. He noted
that Mr. Beedle had answered his second question.
NICO BUS, ACTING DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF NATURAL RESOURCES, stated that the
three fiscal notes for the Department were based on Version
N of the bill, and would change for the new Version O. He
pointed to the Fund Source section on the fiscal note
Component No. 423, dated 4-6-04, explaining that after the
Permanent Fund distribution has been made, 4% of the DNR's
total revenue stream, or $36 million of revenue would go out
of the General Fund and out of the Land Disposal Income Fund
to the University endowment and the public school trust
fund. It would change by about $9 million for the extra 1%
in Version O.
Mr. Bus stated that fiscal note Component No. 424 is
basically a traditional note that explains the cost of
administration would be $25 thousand for the first year.
This would set up all the accounting, with ongoing costs for
future years at 7% because it increases the size of the
account structure and reconciliation requirements.
Mr. Bus explained that fiscal note Component No. 435, Forest
Management & Development, takes $18 thousand out of timber
sale receipts from the timber program. Retaining the same
program would require an $18 thousand General Fund
replacement. It assumes all receipts, not new receipts. He
said that fiscal note Component No. 2459, Title Acquisition,
is no longer needed.
Representative Ogg clarified that because the bill is
written on all new receipts from new contracts in FY 05, the
number on fiscal note Component #423 is zero because there
aren't any new contracts yet.
Representative Hawker requested clarification because the
fiscal notes show a 2% conveyance to the University and 2%
to the education trust, and he asked if Work Draft Version O
changed it to 2% and 3% respectively. Mr. Bus replied that
he is correct, and it would bring an extra $9 million. As
Representative Ogg pointed out, if it is all new contracts,
the DNR would have to completely start over, and assume the
revenue of the new contracts.
Co-Chair Harris asked how much land this legislation would
give to the private sector. Representative Ogg replied that
it would be the State's decision under this proposal of the
tenancy in common. The DNR would manage the lands, and it
would determine which lands to lease or sell to the private
sector. The University would not actually receive any of the
land. In response to a question by Co-Chair Harris,
Representative Ogg noted that the University would receive a
percentage of the revenue generated by the sale or lease of
the land.
CO-CHAIR HARRIS asked if this bill would make it easier for
the public to get land.
DICK MYLIUS, DEPUTY DIRECTOR, DIVISION OF MINING, LAND AND
WATER, DEPARTMENT OF NATURAL RESOURCES, replied that it
would, if SB 7 persists, because some of the lands that the
University would pick would be the better land disposal
parcels that DNR has identified for future land sales. The
Department has held off on land sales in McCarthy because
the University desired the land under SB 7.
Co-Chair Williams asked how the 2% POMV would work. Mr.
Beedle replied that Fiscal Note #4 contains assumptions
based on DNR having eligible land and resource earnings of
$100 million per year. If the Department were successful in
getting 2% of $100 million, the $2 million would go into an
endowment. Under the five-year averaging approach, 20% would
total $400,000 and DNR would earn 5% of that, so the second
year revenue to the University would be $20,000. By the
year 2010, it would grow to $300 thousand a year, and about
$700,000 by 2014. It would take years to build meaningful
revenue for the University.
Co-Chair Williams asked about the public school trust and
any concerns the Attorney General's (AG's) office might
have.
EDDY JEANS, MANAGER, SCHOOL FINANCE AND FACILITIES SECTION,
DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, replied that
he hadn't talked to the AG's office about Version O. He
assumed that the separate account of the contributions to
the trust is acceptable, but he would check with the AG's
office. The current public school trust is a dedicated
fund, and the Department receives one-half of 1% of the
proceeds annually.
Co-Chair Harris asked the University's position on the bill.
PETE KELLY, DIRECTOR OF STATE RELATIONS, UNIVERSITY OF
ALASKA, stated that the University is in favor of the bill,
and it would benefit from receiving a steady flow of income
even though it is long term.
Co-Chair Harris asked if this bill would bring more revenue
from lands allocated under the University's control. Mr.
Kelly noted that the lands envisioned under SB 7 wouldn't
produce for some time, with no guarantee that the land would
be marketable, or of the exact revenues that would derive
from the land. He noted the liabilities and costs involved
with managing that land.
Co-Chair Harris asked if it would all be State land. Mr.
Kelly affirmed that it would be State land currently managed
under Title 38.
Co-Chair Williams asked the University's viewpoint after
fighting for the 250,000 acres in SB 7. Mr. Kelly noted that
SB 7 is still in the courts and a long way from producing
revenue, while the provisions of HB 333 are simple.
Co-Chair Williams asked the University's viewpoint if the
Legislature does not repeal SB 7. Mr. Kelly responded that
he couldn't speak for the Board of Regents, but it would be
better to have income both from land and a trust account.
Choosing between the two, he said that this legislation is
simpler. Co-Chair Williams commented that he supported the
University land bill.
Representative Fate asked if there was federal legislation
accompanying the land bill that passed last year. Co-Chair
Harris answered that it was a federal match.
Representative Ogg commented that Senator Murkowski was
unable to get legislation through Congress that would match
250,000 acres of State land with 250,000 acres of federal
land. Mr. Kelly added, one of the problems with the Federal
land is that the unreserved, unrestricted land the
University would receive from the Federal government is not
that productive.
Representative Croft commented that the bill would be more
beneficial for K-12 than for the University.
Co-Chair Williams replied that he was suggesting doing both,
not one or the other. He thought that the University might
need more money in the future.
Representative Hawker asked about SB 7 and the issue before
the court. Representative Ogg replied that the Superior
Court must still decide whether it was an unconstitutional
dedication. With some exceptions, under the Alaska
Constitution, "the proceeds of any state tax or license
shall not be dedicated to any special purpose." He said that
if HB 333 passed and SB 7 is rescinded, the court case
becomes moot.
Representative Hawker asked if this bill is also subject to
the same criticism of an unconstitutional dedication of
funds. Representative Ogg replied that it is crafted the
same way as SB 7 in passing a vested title in State lands,
and both are subject to that issue.
Representative Croft asked the timeframe in reaching the $36
million figure on fiscal note Component No. 423.
Representative Ogg referred to the background information on
page 2 of the Legislative Research Report (copy on file)
showing new cumulative revenues of $21 billion from 2006 to
2030. The University portion would yield $400 million and
the K-12 would be $600 million off the revenue. The
University would receive $20 million annually.
Representative Ogg thought that the revenues under SB 7
would not reach those levels.
HB 333 was heard and HELD in Committee for further
consideration.
HOUSE BILL NO. 422
An Act repealing the special subaccount established in
the constitutional budget reserve fund; relating to the
powers of the Department of Revenue for the investment
of amounts in the constitutional budget reserve fund;
and providing for an effective date.
Co-Chair Harris commented that Minority Leader Berkowitz had
expressed concerns about this bill, and he asked if this
would merge accounts in the Constitutional Budget Reserve
(CBR).
JAMES ARMSTRONG, STAFF TO REPRESENTATIVE WILLIAMS explained
that this would repeal the law enacted in 2000 by Senator
Torgerson that created a subaccount within the CBR of $400
million. The subaccount has a long-term investment horizon
of five years and the goal is to capture a higher yield.
Co-Chair Harris asked if that has occurred. Mr. Armstrong
affirmed that there has been a higher yield over the past 6
or 7 months. Co-Chair Harris asked about the historical life
of the separate fund. Mr. Armstrong replied that it hasn't
made as much as had been anticipated, perhaps $20 million.
TOMAS BOUTIN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
(DOR), discussed the returns of the subaccount and the main
fund of the CBR, referring to information he had provided to
the committee.
TAPE HFC 04 - 79, SIDE B
Co-Chair Harris asked, with the subaccount invested more
liberally, which account has earned more. Mr. Boutin replied
that the subaccount hasn't existed for 5 years. The 3- year
timeframe shows an earned rate of 1.8% return for the
subaccount, while the main fund has earned around 6%. The
strong recovery in equities over the past year has pulled
the Fund back into "the black." He explained that
fundamentally, the way the CBR has been used doesn't suggest
a long-term investment horizon or anything but the fixed
income investments of the type in the main Fund.
Co-Chair Harris asked if the DOR anticipates not less than
$1 billion would remain in the Constitutional Budget
Reserve. Mr. Boutin said that is correct. Co-Chair Harris
asked the current balance in the CBR for a draw this year.
Mr. Boutin explained that the Department uses the CBR as a
checking account that is repaid from the General Fund. The
CBR draw at the end of this fiscal year would be $50
million, if the average daily price of oil continues upward
and oil is higher than the spring forecast on which the FY
05 budget is based.
Co-Chair Harris asked if oil is averaging $29 per barrel
this year. Mr. Boutin clarified that it is about $30.60 per
barrel for the fiscal year to date.
Representative Foster asked the net to the state treasury
when the oil price increases one dollar for the year. Mr.
Boutin said that he used "a rule of thumb" of $65 million,
which is fairly accurate.
Co-Chair Williams questioned putting in a trigger to keep
the CBR working. Mr. Boutin expressed that if the entire CBR
had been put into equities a year ago, there wouldn't be a
problem today, but market timing is not a strategy for
public funds, which follow fundamental investment
principles. Even with agreement that the Constitutional
Budget Reserve could not fall below $1 billion, about $300-
400 million would be needed for revenues and expenditures
each year, and the balance of $600 million would be needed
for the oil price plummet that will ultimately occur. He
argued that this suggests a fixed income investment, rather
than a long-term investment of real estate or equities.
Representative Croft discussed the concept of a trigger and
switching between investment strategies. He thought that
with the diminishing Constitutional Budget Reserve, it is
almost imperative to repeal the subaccount.
Co-Chair Harris commented that the Legislature is
anticipating nearly a $400 million draw from the CBR this
year. Representative Croft replied that although technically
$400 million was withdrawn, all of it would not be needed if
oil prices hold steady for another few months. He thought
that it has become more of a legal question of whether the
Majority had the authority for the CBR draw, and it is
almost moot with the current oil prices.
Co-Chair Williams asked for a comparison of how much the
subaccount lost last year in relation to the main CBR. Mr.
Boutin referred to the table, "Constitutional Budget Reserve
Subaccount" (copy on file). In response to a question by
Mr. Armstrong, Mr. Boutin clarified that it is current
through 12-31-03.
Mr. Boutin stated that even if there had not been a bear
market and these equities were doing well, the fundamental
investment principles used by DOR and other state agencies
argue for not having this long-term investment horizon.
Co-Chair Harris MOVED to report CSHB 422(STA) out of
Committee with the accompanying fiscal note. There being NO
OBJECTION, it was so ordered.
CSHB 422(STA) was REPORTED out of Committee with a "do pass"
recommendation and with one previously published fiscal
impact note.
CS FOR SENATE BILL NO. 301(FIN)
An Act relating to the Alaska Pioneers' Home and the
Alaska Veterans' Home; relating to eligibility for
admission to the Alaska Pioneers' Home and Alaska
Veterans' Home; relating to the eligibility of
residents for the Alaska Pioneers' Home and the Alaska
Veterans' Home for general relief assistance; relating
to state veterans' home facilities; making conforming
amendments; and providing for an effective date.
Co-Chair Harris MOVED to ADOPT Work Draft Version U. There
being NO OBJECTION, it was so ordered.
DENNIS DEWITT, SPECIAL STAFF ASSISTANT, OFFICE OF THE
GOVERNOR, explained that the differences between the
proposed Committee Substitute Version U and SB 301 are found
on pages 6 and 7. The amendment substantively named all of
the Pioneers Homes currently in operation instead of just
the Sitka Home, on page 7, line 1. On page 6, line 31, and
page 7, lines 2 and 5, the words "and operate" were added to
"may maintain." He pointed out that those amendments make SB
301 identical to HB 440, which the House Finance Committee
has heard.
Representative Stoltze questioned the amendment made in HESS
and whether Mr. DeWitt agrees with the rationale that Mat-Su
is the most appropriate place for a veterans' home.
Mr. DeWitt explained that the selection of the Palmer
Pioneers Home was based on several factors including the
LB&A Committee study that reported the most advantageous way
to finance a veterans' home was to convert a pioneers' home.
He stated that if another conversion were considered in the
future, it would be a policy issue brought before the
Legislature. For that reason, language was added in Section
15 to limit the conversion process only to the Palmer
Pioneers Home at this time.
Co-Chair Harris referred to the fiscal notes, and asked if
the federal money is a factor in the conversion. Mr. DeWitt
explained that the Veterans Administration (VA) provides
funding for veterans who are in a state veterans' home at
$26.95 per day. Alaska needs a state veterans' home for its
vets to access those benefits to which they're entitled.
This bill allows the conversion under the U.S. Veterans
Administration. The veterans in the Palmer veterans home
could receive the benefit of about $800 a month. The
advantages would be to offset General Fund contributions to
individuals with subsidized care, and to offset the cost to
individuals paying for their own care.
Co-Chair Harris asked if the veterans would be eligible for
care at Palmer medical facilities or the hospital on the
base. Mr. DeWitt replied that routine care would be offered
through the Veterans Administration, but the Administration
will address the process of moving the veterans who need
care. In response to a question by Co-Chair Harris, Mr.
DeWitt confirmed that the bill simply authorizes the Palmer
conversion.
In response to a question by Representative Fate, Co-Chair
Harris noted that the language designating the Palmer
Pioneers Home conversion is on page 7, line 5.
Representative Stoltze commented that he had gotten
assurances of a slow transition and that no one would be
forced to move out of existing senior housing. Mr. DeWitt
referenced language in Sec. 26 on page 13, lines 6-13, which
provides that a resident may not be evicted or required to
relocate to a different Alaska Pioneers' Home or Alaska
Veterans' Home facility. The Governor's Office is working
with the VA to gain assurances that it will not violate this
portion of state law. It is a high priority for Governor
Murkowski.
Representative Croft questioned if relatives in the Palmer
area would have to go to the Anchorage Pioneers Home. Mr.
DeWitt explained under the VA requirement, 75% or 62 of the
beds would be reserved for vets, with the remaining 20 beds
filled by the existing Pioneers Home waiting list. He noted
that today one individual is on the waiting list for the
Palmer Pioneers Home.
Co-Chair Harris asked if the bill has the support of the
Pioneers of Alaska and the military veterans groups. Mr.
DeWitt affirmed that his office had worked out all their
concerns and has the support of both groups.
Representative Foster MOVED to report HCS CSSB 301(FIN) out
of Committee with the accompanying fiscal note. There being
NO OBJECTION, it was so ordered.
HCS CSSB 301(FIN) was REPORTED out of Committee with a "do
pass" recommendation and with one previously published
fiscal impact note.
ADJOURNMENT
The meeting was adjourned at 3:00 P.M.
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